Merkel agrees fiscal consolidation and growth needed

Reuters Staff

3 Min Read

BERLIN (Reuters) - Chancellor Angela Merkel is in a “high level of agreement” with French President Francois Hollande, British Prime Minister David Cameron and Italian Prime Minister Mario Monti that both fiscal consolidation and growth are needed, her spokesman said.

German Chancellor Angela Merkel makes a statement at the Chancellery in Berlin, May 16, 2012. REUTERS/Fabrizio Bensch

Merkel’s spokesman Steffen Seibert said in a statement on Thursday the four leaders had taken part in a video conference call ahead of the G8 summit meeting together along with EU Commission President Jose Manuel Barroso and Herman Van Rompuy, president of the European Council.

“There was a high level of agreement that fiscal consolidation and growth are not contradictions, but rather both are necessary,” Seibbert said.

German government sources said this week that Europe’s sovereign debt crisis will be a key issue of discussion at the G8 meeting.

Merkel and Hollande had met in Berlin on Tuesday for the first time with both pledging to forge a joint approach on how to boost growth in recession-plagued Europe in time for an EU summit next month while acknowledging differences.

Their meeting was closely watched for signs the leaders of Europe’s biggest economies will be able to move beyond a war of words over how to resolve the debt crisis that now threatens to tear apart the 13-year-old currency bloc.

Hollande sharply criticized Merkel during his election campaign for insisting on tough austerity to bring down suffocating debt levels across the euro zone. She in turn had backed Hollande’s rival, conservative incumbent Nicolas Sarkozy.

Supported by others in southern Europe, Hollande has vowed to shift the focus to growth and reopen a tough new set of budget rules that Merkel and other EU leaders agreed to adopt earlier this year - a step considered taboo in Berlin.

The new Franco-German couple - referred to by some as “Merkollande” - took care to play down their differences on Tuesday, hoping to send a signal of unity at a time when speculation is growing that Greece may have to exit the euro zone and return to the drachma.

Instead of reopening Merkel’s “fiscal compact”, they are expected to complement it with a new “growth pact”.

Berlin has already signaled it is open to several ideas favored by Hollande, including more flexible use of EU structural aid, a bigger role for the European Investment Bank and the introduction of “project bonds” to foster investments in infrastructure like transportation and energy networks.

But most economists agree that these steps will make little difference to countries like Greece, which is in its fifth year of recession and has seen unemployment surge to 22 percent. That means Germany is likely to come under pressure to take additional steps, like giving struggling euro countries more time to reduce their deficits, a step it has so far resisted for fear of spooking jittery financial markets.